CONTRIBUTORS
Stephen Dover, CFA
Chief Investment Strategist
Head of Franklin Templeton Institute
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
Taylor Topousis, CFA
Market Strategist
Franklin Templeton Institute
Priya Thakur, CFA
Analyst
Franklin Templeton Institute
Avinash Shetty
Lead Analyst-Research Services
Global Research Library
Key points
- Secondaries exhibit attractive fundamentals and structural advantages.
- Real estate has been beaten down and valuations are now more attractive.
- Private credit has filled a void that traditional lenders have created.
- Dispersion of returns are likely to increase, separating the winners and losers.
- This is a better environment for allocating capital than recent years.
Executive summary
We will cover these key points throughout the outlook. We believe that secondaries will continue to benefit from the slowed exits and institutions’ need for liquidity. We believe that private real estate valuations have come down to more realistic valuations and there are opportunities in industrials, multi-family housing and life sciences. Private credit managers are well positioned to fill the void banks have left, and to negotiate favorable terms and covenants.
Given the amount of capital that has been raised in the private markets, and the changing regimes, from an environment with easy money and benign inflation, to rapidly raising rates and high inflation, to falling rates and stubborn inflation, we anticipate a larger disparity between the winners and losers in the coming decade. With that said, we believe that managers putting capital to work today can take advantage of more attractive valuations and being a “term-maker” versus “term-taker” (i.e., the ability to dictate terms).
As always, to learn more please visit the Insights Library. And if you haven’t already done so, please subscribe to the Alternative Allocations podcast to hear from industry experts about allocating capital.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
To the extent the fund invests in alternative strategies, it may be exposed to potentially significant fluctuations in value.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. Diversification does not guarantee a profit or protect against a loss.
Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.